Bernanke And Mishkin On Helicopter Drops

by: Scott Sumner

There are two serious approaches to deal with the zero bound, and one deeply unserious approach. The two serious proposals are:

1. Unconventional policy tools (quantitative easing, qualitative easing, negative IOR)

2. A new policy target (price level targeting, NGDPLT, 4% inflation, etc.)

And one deeply unserious proposal:

1. Helicopter drops

In this video, Frederic Mishkin points out that the Fed is not even authorized to do helicopter drops. And the idea that the GOP Congress would go along with this sort of scheme is ludicrous. (And people somehow think I'm unrealistic for talking about NGDP futures markets.)

And yet helicopter drops seem to be all the rage at the WSJ, the Economist, and Bloomberg.

Back in 2004, Ben Bernanke (in a paper with Vincent Reinhart and Brian Sack) discussed the real issue:

The greater the confidence of central bankers that tools exist to help the economy escape the ZLB, the less need there is to maintain an inflation "buffer," and hence the lower the inflation objective can be.

Helicopter drops are not even an option. Either you use unconventional tools aggressively enough to hit your target (and there is no limit to how aggressively they can be used) or you set a policy target where the zero bound does not occur (or does not create problems if it does occur, as with level targeting).

It's a sad commentary on the media that they are buying into this notion that central banks are out of ammo, even as central bankers insist they are not out of ammo, and the Fed is raising interest rates despite inflation being below 2%, and expected to remain below 2%.

Also note this suggestion from the same paper:

Despite our relatively encouraging findings concerning the potential efficacy of nonstandard policies at the ZLB, we remain cautious about making policy prescriptions. Although it appears that nonstandard policy measures may affect asset yields and thus potentially the economy, considerable uncertainty remains about the size and reliability of these effects under the circumstances prevailing near the ZLB. Thus we still believe that the best policy approach is one of avoidance, achieved by maintaining a sufficient inflation buffer and easing preemptively as necessary to minimize the risk of hitting the ZLB. [emphasis added]

The Fed obviously ignored that advice in 2008, and they are ignoring it today. The question is why?